An Overinvestment Cycle in Central and Eastern Europe?

Abstract

Prior to the Asian crisis, benign liquidity conditions contributed to credit expansion and overinvestment in the East Asian economies until they were hit by a deep recession (Saxena and Wong 2002). Similarly to the developments in the tiger economies in the nineties, the CEE economies grew rapidly from 2001 to 2007, due to foreign capital inflows. But the current global financial turmoil and economic downswing also pulled the CEE economies into the maelstrom of the crisis. With the Asian experience in mind, the aim of this paper is to analyze whether overinvestment due to benign liquidity conditions possibly emerged and contributed to the crisis in CEE.